Dollar rises after E.U. bank move, Fed decision

British pound slips after U.K. rating outlook downgraded

By

DeborahLevine

WilliamL. Watts

SAN FRANCISCO (MarketWatch) — The U.S. dollar rose against the Japanese yen to its highest level since March on Thursday and sat little changed versus the euro after regional leaders moved closer to a banking union and gave Greece its bailout money.

The ICE dollar index
DXY, +0.38%
which measures the greenback’s performance against a basket of six major currencies, edged up to 79.925, from 79.858 in North America late Wednesday.

Fed extends bond buying into 2013

(14:47)

The Fed refashions its bond-buying programs, extending its far-reaching effort to revitalize the jobs market and boost the economic recovery into 2013.

The dollar fell Wednesday after the Federal Reserve said it would maintain ultra-low interest rates until the unemployment rate drops below 6.5%, unless inflation accelerates. As expected, the central bank also said it would keep buying Treasury bonds. See: Dollar falls as Fed sets target on rates.

Strategists said worries about the U.S. fiscal cliff were underpinning the dollar, which tends to gain ground as risk appetite declines.

U.S. stocks fell on Wall Street after House Speaker John Boehner pressed the White House Thursday for spending-cut proposals. At a press conference, Boehner said spending is the problem. Afterwards, Senate Majority Leader Harry Reid said Americans shouldn’t have their taxes held “hostage” to Boehner news conferences. Read: U.S. stocks fall after Boehner comments.

On Wednesday, Fed Chairman Ben Bernanke warned that the Fed won’t be able to shield the U.S. economy from the impact of heavy spending cuts and tax hikes that will take effect on Jan. 1, unless the White House and Congress reach a compromise. See: MarketWatch’s full coverage of the fiscal cliff.

“While help for risk assets from the Fed might grab some attention, now it’s likely that avoidance of the fiscal cliff will prove more important,” said Steven Barrow, currency and fixed-income strategist at Standard Bank.

“Of course, the big question here is whether a deal can be struck in time or whether the U.S. will topple over the cliff, at least temporarily, because a complete deal cannot be brokered and voted before the end of the year. We still see risks of a topple but if there is any selloff in risk assets as a result, it looks as if willing buyers will step in, even if it is a quiet time of year,” he said.

European banking union, sort of

The euro
EURUSD, -0.83%
gave up most of its gains to trade at $1.3077 from $1.3070 late Wednesday. The initial rise came following news that European Union finance ministers agreed to move the bloc closer to a banking union by bringing the region’s largest lenders under the European Central Bank as a supervisory authority. See: Europe gets deal to make ECB bank regulator.

The Japanese yen weakens vs. the dollar.

The decline in financial stresses should help reduce how much the euro-zone’s growth underperforms relative to other major economies, pushing the euro to $1.35 in the first quarter, analysts at Westpac said.

“However, relative growth should swing back in the U.S.’s favor as the year progresses, weighing on the euro back to $1.25,” they said.

Against the Japanese yen, the dollar
USDJPY, -0.11%
traded at ¥83.65, it’s strongest since March and from the ¥83.26-level it hit overnight.

“Many Japanese exporters put currency hedges in place around ¥83 to protect against adverse Japanese yen strength; if these firms believe the pair will have a sustained move above ¥83, then you may see a number of them unwind [them], pushing U.S. dollar/yen even higher,” said Stan Shamu, a strategist at IG Markets.

The Swiss franc strengthened despite the Swiss National Bank’s reiteration of its determination to keep the currency from gaining versus the euro. The dollar
USDCHF, +0.50%
changed hands at 0.9241 francs, down from 0.9264 francs earlier, while the euro
EURCHF, -0.34%
traded at 1.2086 francs, down from 1.2110 francs.

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